Political risk

2014 has rapidly turned into the year of geopolitics. Here are some of the key developments.

From Russia’s involvement with Ukraine, to China’s outlook on territorial waters, 2014 has been shaping up as the year of geopolitics being one of if not the key investment factor.

Serena Giordano, vice president and Product Specialist at Deutsche Asset & Wealth Management in Milan sees the move by central banks to downscale their stimulus policies as leaving a vacuum, which is being filled by geopolitics as a factor affecting financial markets, prices and flows of capital.

“In 2014, many emerging market countries will be going to the polls.

The outcomes of elections in unstable countries such as Egypt, Turkey, Ukraine – now without Crimea – South Africa and Indonesia are all a potential source of volatility,” she says.

“However, let’s not forget that many outflows from emerging market debt and equity seem to have stopped recently and the strong depreciation of EM currencies, together with the reforms that are underway or have been announced by candidates, can represent a positive turning point.”

Upsides, downsides

It is important to recognise that as a factor political changes are not necessarily harbingers of downside risk.

FMG, the Malta headquartered manager, which has been invested in frontier markets since the mid-1990s, has said recently that the ability to bring its oil industry on stream means that Iraq could become the second fastest growing economy over the coming 10 years, as it starts to compete with Russia and Saudi Arabia as one of the biggest oil exporters.

Other markets in the Middle East North Africa (MENA) region remain challenging because of the risk associated with politics, but valuations mean that they remain attractive markets in which to do business, according to FMG.

Further afield, SooHai Lim, investment manager of the Baring ASEAN Frontiers Fund, sees the raft of elections hitting the Association’s member states as an opportunity.

“The second half of this year could be particularly rewarding for investors.

“Jakarta governor Joko Widodo is his party’s nominee for the July presidential election and this could be good news for investors given his successful track record of reform.

“Barings anticipates that under his leadership, Indonesia will embark on further reforms more decisively and that will support Indonesia’s medium-term growth outlook.”

Still, there are some warning signs, and investors in the ASEAN region also express frustrations over ongoing political uncertainty.

“Year-to-date foreign investors have net sold about $900m worth of stocks in Thailand – coming on top of the $6bn outflows last year. While in the short term investors are clearly concerned about political developments, whether that affects sentiment in the longterm will depend on how the political situation evolves. A new functioning government, albeit an interim one, would likely have to address the economy among its agenda, and the market should, in this scenario, react positively.”